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Japan's Deflationary Destiny Ordained By Demographics And The BOJ

Last week saw the likely death of Abenomics. It is not a foregone conclusion but Prime Minister Shinzo Abe will need to come out fighting in a very un-Japanese way to save his program of national regeneration. In a few short weeks he has gone from hero to zero.

Most likely, Abe will soon be the umpteenth one-year Japanese leader in a line of political failure. Japanese politics is in hopeless gridlock because no politician is able to break the gentle but profound decline. The situation is very real. Within two generations the Japanese population will collapse from 120 million to 60 million, underpinned and accelerated by the deflationary policies of the Bank of Japan.

Japan would like to think of itself as a democracy, but it isn’t. There are plenty of false democracies, such as Iran where the dictator Khamenei rules the country. In Japan the dictator is not a religious zealot but a financial one, the BOJ.

The Japanese Central Bank controls the long-term monetary policy of Japan and thereby the national checkbook. It wields power it as it see fit, which is starkly against the wishes of the Diet, Japan’s parliament.

The BOJ policy is long term and based on population collapse whilst, as always, democracy looks towards growth. Democracy and central banking are at loggerheads but the BOJ controls the money and therefore trumps the people.

The strategy of managed decline through deflation is based around the argument that the population is inevitably falling and continuing to age. This means that to look after the old you necessarily have to make the young carry the burden.

Inflation transfers resources from the old to the young, deflation transfers resources from the young to the old. Japan must have deflation.

The nation’s sovereign debt will be repaid by death duties in due course, but Japan’s problems stem from too large a population. Japan is a resource strapped nation better suited to 60m people. The government cannot make people have children, but it can help look after the old which is the duty of the nation. Deflation achieves these goals

This is in diametric opposition to the elected government.

The economic strategy of democracies is always the same: inflation. Grow the country and its state through economic expansion. Take resources from the old and give to the young through inflation. The young are economically active and should be boosted at the cost of the economically passive. Growth and inflation solve all debt problems in the end.

Whilst the BOJ’s strategy is defensive, Abe’s is attacking. Money talks though and Abe does not control it. The BOJ strategy spectacularly won this month as it crushed the Abenomic economic rebellion by inaction and signalling. The Yen rallied and the Nikkei crashed.

The crash of the Nikkei is probably the death knell for Japan as a nation.

Japanese demographics have already rolled over into decline. The population is now falling and humans do not breed well in captivity. The only way to halt this collapse, or even slow it, is through economic growth.

If Japan wants a 90 million population rather than 60 million, a figure less than 1% of the world’s population, it must slow its decline now. In ten years it will be too late and it may end up with a population below 50 million by the end of the century.

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